Donald Kohn, a member of the Bank of England’s Financial Policy Committee, said the memory of the debt crisis may spur regulators to keep pushing new rules even when the banking system has recovered.
“Much has been written and analyzed about the challenges of conducting macroprudential policy in good times -- taking away the prudential punch bowl as the party gets going,” Kohn said in a speech in Washington today. “It won’t be easy, but in my view the widespread awareness of these problems along with the memory of the very tough times we are now experiencing because of past credit excesses will make it reasonably likely that the authorities will do the right thing.”
The U.K.’s FPC was set up by the government to take over banking regulation and ensure the stability of the financial system. The committee, which met on Nov. 23, said this week that risks from the euro-area debt crisis have increased and urged banks to enhance efforts to bolster their defenses.
“When we met a week ago, we recognized that the threat from the problems in the euro area had intensified and, as a consequence, so had the need for an ample capital cushion,” said Kohn, a former Federal Reserve vice chairman. He was speaking at a conference sponsored by the U.S. Financial Stability Oversight Council and the Treasury’s Office of Financial Research.
Echoing the FPC recommendations published this week, he also said it is “critically important” that banks not try to bolster their strength by reducing the availability of credit to U.K. companies or households, even in periods of stress.
On the panel’s recommendation that banks disclose leverage ratios to investors by the start of 2013, two years earlier than Basel rules originally required, Kohn said that additional information “will help counterparties evaluate risk, bolster market discipline, and provide greater incentive for U.K. banks to raise capital and constrain leverage.”
Kohn served as a top aide to former Fed Chairman Alan Greenspan from 1987 to 2002, when he was director of the Division of Monetary Affairs and later an adviser to the Board for Monetary Policy. Prior to these assignments, Kohn had worked at the Fed in a variety of staff positions since 1975.